Is Weave Communications (NYSE:WEAV) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Weave Communications, Inc. (NYSE:WEAV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Weave Communications

What Is Weave Communications's Debt?

As you can see below, Weave Communications had US$10.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$118.4m in cash to offset that, meaning it has US$108.4m net cash.

A Look At Weave Communications' Liabilities

Zooming in on the latest balance sheet data, we can see that Weave Communications had liabilities of US$69.9m due within 12 months and liabilities of US$60.0m due beyond that. Offsetting this, it had US$118.4m in cash and US$3.71m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$7.76m.

Having regard to Weave Communications' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$866.3m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Weave Communications boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Weave Communications's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Weave Communications reported revenue of US$162m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Weave Communications?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Weave Communications had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$178k and booked a US$33m accounting loss. But the saving grace is the US$108.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Weave Communications .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.